Good morning and welcome to today’s foreign exchange market commentary on Friday the 09th December.

As the Eurozone thriller drags on endlessly, plots change faster than Hitchcock’s blockbusters. New heroes emerge, only to turn into villains overnight. That Prime Minister David Cameron doesn’t look eye-to-eye with President Nicholas Sarkozy is a well known fact. Sparks have flown whenever the two have met in the past couple of months. It was no surprise that the two crossed swords again when they two came face-to-face yesterday.

Unfortunately David Cameron had to take the blames this time for failing to agree to a new treaty to solve eurozone’s woes. President Sarkozy termed his demand for concessions to protect London’s financial dominance ‘unacceptable.’ Though the Tories complemented Cameron for protecting London’s financial interests, critics have quickly pointed out that Britain’s isolation within would ensure its status relegated to that of a Malta or Latvia.

Excepting the UK and Hungary, 23 of the 27 EU member nations are pushing ahead with tougher economic and fiscal sanctions to restore the region’s credibility. Czech Republic and Sweden will consult their parliaments before joining the party.

The PM had insisted that any new treaty involving all the 27 nations would guarantee that British voice would be heard on crucial policy issues and will not undermine the financial services sector – crucial for UK’s economy. However, Germany and France decided to move ahead to set up a separate treaty to achieve their ends. However, the problem with the core 17 countries is that the approval of EU institutions, specifically the European Commission, to implement future treaty changes would require the backing of all 27 members. That leaves Cameron with some more bargaining space.

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EURO: The ECB’s rate cut by 25 bps went almost unnoticed yesterday with the market remaining preoccupied with the EU leadership summit in Belgium on Thursday. The mood turned negative as ECB president Mario Draghi made no reference to increase the central bank’s bond buying plans. The GBP/EUR pair rallied to a high of 1.1767 after Chancellor Merkel declared there would be no ‘big bang’ solution to the debt problems. As the markets remain unimpressed on the second day of the EU Brussels summit, the GBP/EUR pair opens lower at 1.1717.

USD: The BoE did not announce any surprise policy changes yesterday as bank rate remained unchanged at 0.5 per cent and the asset purchase target (quantitative easing) at the earlier £275 billion target. The GBP/USD pair rallied shortly to 1.5770 before negative news from the EU started hitting in the wires and the cable made a hasty retreat. The greenback made gains across the board on Thursday, along with top performer the JPY. The GBP/USD pair opens at 1.1717 this morning as the market follows developments in Brussels closely.

Elsewhere, the antipodean currencies gained against the greenback yesterday only to lose ground later on negative EU developments. Heightened volatility is expected today as the GBP/AUD and the GBP/NZD pairs open at 1.5485 and 2.0365 respectively.

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